Her Majesty’s Revenue and Customs (HMRC) has released advice notes regarding the taxation of interest on PPI compensation payments.

PPI compensation to financial customers who have been mis-sold payment protection is big business at the moment – £379 million in compensation was paid out in November 2011 and £268 million paid out in October 2011.

HMRC has said that generally speaking there is no tax due on the repayment element of the compensation so long as any additional interest has been taxed at source by the compensating company.

However, banks and building societies making any compensatory repayments have no obligation to deduct tax from this interest and so there may be cases where a customer who has received compensation may need to declare and pay tax on the income derived from the interest.

The tax position in relation to PPI repayments will depend on individual circumstances but in general the position will be as follows:

• If the customer is a non-taxpayer and has had tax deducted from the interest, then they may make a claim to have the tax repaid to them by HMRC in the normal way.
• If the customer is a basic rate taxpayer and tax has been deducted from the interest, then they need do nothing further unless they need to complete a tax return.
• If the customer is a higher rate taxpayer who has received interest with or without tax deducted or a basic rate taxpayer who has received interest without deduction, then the interest should be declared to HMRC on a Self Assessment Tax Return in the normal way.

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Her Majesty’s Revenue and Customs (HMRC) has said that taxpayers meeting the filing deadlines on-time this year was the highest since HMRC was created.

Some 9.4 million, or 90.4 per cent of taxpayers managed to file their 2010-2011 Tax Return on time and avoid incurring late filing penalties. This compared to only 79 per cent last year.

Due to industrial action, HMRC moved the deadline to the 2nd of February, but this did not prevent the 31st of January from being the busiest online filing day. Some 445,000 returns were received this day, with 37,460 of those being filed between 4pm and 5pm – a rate of one every 6 seconds!

Exchequer Secretary to the Treasury David Gauke said:

“I’m delighted so many people filed their tax returns online this year. The record number proves that it’s quick, easy and secure to do.

Despite the record high in on-time filing, the 1 million taxpayers who failed to pay do so face an automatic £100 penalty, and subsequent daily charges of £10 will start to accrue 3 months after the 2nd February deadline.

It will be interesting to see whether HMRC’s systems generate automatic penalty notices where Returns were filed on the extended deadline dates of 1st/2nd February .  If so, the notices should be appealed.

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Payments made by an employer after an employee had ceased working for them used to be taxed at the basic rate of tax.  This was altered so that currently, grauated rates of PAYE tax are applied depending on the level of payment made.

However, share-based payments were excluded from this rule owing to the practical difficulties involved, especially where, perhaps, the broker or the employer are not UK-based.  This exclusion is set to be reversed and HM Revenue and Customs are proposing to tax share-based payments at graduated tax rates using PAYE code “0T”, from 6 April 2012.

This is sure to cause payroll procedural problems for employers and may lead to cash-flow issues for employees with international/cross border work histories.  Different countries apply differing rules to share-based payments, with some taxing by reference to grant, some on vesting and some on exercise/sale.   The tax and social security (national insurance) positions in different countries may also vary!

This is a hugely complex area but our qualified experts are available to help you if necessary.

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When a company goes into voluntary liquidation HM Revenue and Customs (HMRC) allows shareholders to receive the surplus assets of the company as a capital distribution instead of as a dividend. The advantage to receiving these often substantial sums as a capital distribution is that they are eligible for tax at lower rates. If entrepreneur’s relief is available, a capital distribution could be taxed at an effective rate of as low as 10% instead of being taxed as a dividend receipt at an effective rate of up to 42.5%. However, the significant liquidator’s fees can often outweigh this advantage for small and medium sized companies.

HMRC resolved this problem by introducing a concession (ESC C16) that allows a company to be wound up with HMRC’s approval and receive any distribution as a capital gain without having to appoint a liquidator. By simply asking HMRC for approval you can wind up your company and preserve the tax benefits without the significant costs of liquidation. However this advantageous tool has been given a finite lifespan. As of 01 March 2012, if a company undergoes an informal winding up HMRC will only allow distributions up to a maximum of £25,000 to be treated as capital. If the distribution is over £25,000 the entirety of it will be taxed as a dividend. It will still be possible to formally liquidate the company to avoid this £25,000 cap but this will mean incurring the expense of appointing a liquidator.

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HM Revenue and Customs is warning taxpayers about fraud emails being sent out requesting credit or debit card details.

The emails notify the reicipent that they are due a tax rebate and directs them to a fraudulent HMRC website where they are instructed to enter their card details to receive the rebate.  Anybody that inputs their details into the fake site(s) put themselves at risk of identity fraud and having their bank accounts emptied.

HMRC has been actively searching for and closing down such fraudulent websites and the Director of HMRC’s online and digital operations said:

“We only ever contact customers who are due a tax refund in writing by post. We currently don’t use telephone calls, emails or external companies in these circumstances. If anyone receives an email claiming to be from HMRC, please send it to phishing@hmrc.gsi.gov.uk before deleting it permanently.

“HMRC will do everything possible to ensure those people receiving this email know what steps to take to protect their information, and we are working closely with other law enforcement agencies to target the criminals behind this serious crime and see them brought to justice.”

HMRC also published the following advice:

If you have reason to believe that you have been the victim of an  email scam, report the matter to your bank/card issuer as soon as  possible. If in doubt please check with HMRC at http://www.hmrc.gov.uk/security/fraud-attempts.htm

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In June this year we advised our clients that a Statutory Residence Test (SRT) was due to be introduced by the UK Government with effect from 6 April 21012. The proposed test was to be introduced to give individuals clear guidance and certainty in determining their UK tax residence status from this date. The briefing paper we sent out in June can be found here – UK Statutory Residence Test and Non-Domiciled Reforms

The Government has recently announced that it has decided to delay the introduction of the new SRT until 6 April 2013.

This is frustrating for all. The official reason for the delay is that HM Revenue and Customs (HMRC) need time to consider issues that arose as a result of the consultation process with the public, but there is no guarantee that the test will not change significantly from the previously proposed measures.

We assume that the current rules for determining UK tax residence, which are a mixture of mainly HMRC practice/guidelines and case law, will continue to apply at least for the 2011-2012 and 2012-2013 years.

Non-Domiciliaries

The draft 2012 Finance Bill contains details of the proposed increase in the annual remittance basis charge from £30,000 to £50,000 for longer-term UK residents, and a significant new relief for remittance basis users who wish to invest in a UK business. The Government intends for both measures to be introduced from 6 April 2012 onwards.

The proposed investment relief should offer the opportunity for those individuals with “non-dom” status to invest in the UK without creating UK tax liabilities in certain circumstances.

On a positive point it has been clarified that residential property companies will be able to qualify as an “investment” for these purposes, provided that any non-trading activity gives rise to less than 20% of overall business activities.

Non-doms who are interested in investing in a UK business should:

• Start considering what other consequences would result from claiming the remittance basis, if they do not elect for this basis on their tax returns at present;
• Prepare any necessary re-ordering of their affairs and overseas funds/assets, to ensure arrangements are in place and investments will be available when required;
• Search for an appropriate business in the UK to invest in, or prepare to set up a new business; and
• Undertake the usual remittance basis planning required – for example segregating/ring fencing income and capital accounts, setting up trusts, etc.

It has been announced that following the introduction of these measures, there will be no other substantive changes to the UK taxation of non-domiciliaries before the next general election which brings welcome stability and should allow efficient tax planning to take place.

As always, if you feel you need advice in these highly complex areas, please do not hesitate to contact us.

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The Annual Allowance for making UK pension contributions remains at £50,000. However with careful planning relating to “pension input periods” and the three year carry forward of unused Annual Allowances from previous years, it may be possible to receive tax relief in the current tax year on contributions well in excess of £50,000.

With tax relief available at your marginal tax rate of 40% or 50% this would be an attractive proposition so please contact us if you would like to discuss your options.

A change in the pension rules means that the Lifetime Allowance (the amount that can be saved tax efficiently in one’s lifetime) is reducing from £1.8 million to £1.5 million on 6 April 2012.

It is possible to make a “fixed protection” election where this is beneficial although financial as well as tax advice is normally required. If you have not previously made an election and would like to discuss the potential benefits of making one, please get in touch with us.

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We have already reminded our clients that new automatic penalties apply to late filed 2010-11 Tax Returns, even where no tax is owed at the filing date, 31st January 2012. Please don’t be caught out by the new rules and make sure you file on time!

If you have not previously registered with HM Revenue & Customs (HMRC) to submit Self Assessment Tax Returns, and need to file your 2010-2011 Return by 31 January, you are already running out of time, as HMRC say they need several weeks to process registration applications.

Please note that it is important to keep your tax records for at least six years in most cases, to support the accuracy of the figures reported on your Tax Return in case of enquiry.

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The Annual Investment Allowance (AIA) limit will remain at £100,000 for expenditure until 31 March 2012.

For business that are not incorporated and limited liability partnerships, this old limit of £100,000 applies until 5 April 2012.

The AIA, which provides 100% upfront relief for qualifying plant and machinery expenditure, will reduce to £25,000 per year from these dates.

However, although in many cases it may be beneficial to advance expenditure, transitional / timing issues mean that delaying expenditure may also be beneficial.

If you would like to review how the transitional period impacts your business, please let us know.

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The Government has recently announced that the long awaited SRT will now be delayed and will not be introduced until April 2013.

We are sending a separate communication to our clients alerting them to this, but please contact us if you have any doubts as to how this will impact your tax residence position. Out assumption at present is that the “old” rules (a mixture mainly of HMRC practices and law) will apply until 5 April 2013, although there have been calls in some quarters for it to be possible to “elect in” to the new rules previously proposed, from 6 April 2012.

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